Is your portfolio Amazon-proof?

The announcement from corporate heavyweights, Amazon, JP Morgan and Warren Buffett’s Berkshire Hathaway to join forces and launch a new healthcare company to meet American workers’ medical needs, has investors sitting up.

This isn’t Amazon founder Jeff Bezos’ first foray into the healthcare space. Back in 1999, Amazon bought a big stake in drugstore.com, hoping to do for pharmaceuticals what the online retailer had done for books - grab market share and bring down prices. But Amazon ended up selling its acquisition just over a decade later, with US healthcare proving “too big to disrupt” with a few large incumbents controlling the market.

But Bezos isn’t one to take failure lightly. As this morning’s FT reports - he’s back and this time he has reinforcements in Buffett and a major investment bank. Their plan is to create a tech-focused healthcare provider offering American employees something they have long yearned for - high quality health care at affordable prices.

The plan might be scant on the details, but that didn’t stop the news from wreaking havoc with the share prices of incumbent firms. This might be an operation ‘free from profit-making incentives’ but it will do something far bigger than make money. It will fundamentally shake up America’s healthcare industry in the interests of society.

Buffett has described America’s soaring healthcare costs as a “hungry tapeworm” which is hurting the competitiveness of US companies and the economy more broadly. In the States, employer-sponsored health insurance is the norm, which means companies are facing an increasingly bigger bill to insurance companies. The trio’s thinking is that this money could be better spent on new jobs or technological solutions, which lower the cost of healthcare.

This morning’s news has not only hammered the share prices of the US healthcare players but also those of big global insurers like AXA, Allianz, Zurich, Generali and Aviva.

The big worry here centres around data. Tech companies have been able to forge strong relationships with their customers and this has enabled them to collect huge amounts of data. Amazon’s algorithms know more about what we want, and when we want it, than we ourselves do. If this data is used the right way it could lead to more accurate pricing and better underwriting decisions than the insurers have traditionally been able to achieve.

Share prices get beaten up simply on a rumour that Amazon may enter a company’s market. And even decades of operational experience is no defence.

For investors, the bigger question is whether their portfolio is Amazon-proof. As fund manager, David Coombs of the Rathbone Multi-Asset portfolio funds points out, in many ways Amazon seems to be the new gold.

He explains: “Owning Amazon is now kind of a hedge against the so-called ‘Amazon Effect’ - a new factor risk in equity markets. Like gold, another popular hedge, Amazon is difficult to value. How much potential earnings are on offer from a company that is building such formidable defensive moats around itself? With both gold and Amazon, you can make arguments that it looks expensive or that it’s too cheap almost simultaneously.

“And like gold, you are arguably buying Amazon with faith – faith that Jeff Bezos will deliver.”

James Thomson, manager of the Rathbones Global Opportunities Fund, which is on the Fidelity Select 50 list, has Amazon as his second-largest holding. He says investors need to be acutely aware of structural change. Nowhere is this more evident than in retail. “Of all the sectors I look at, retail is undergoing the most upheaval, primarily in the way people shop, where they shop, and heavy levels of promotion and price cutting. The Amazon steamroller is the company everyone fears the most.”

Only time will tell if the Bezos, Buffett and JP Morgan tie-up will deliver, but they have the track record, the expertise and most notably, the data. If there’s one thing we, as investors can be sure of, it’s that when it comes to the tech giants, there is no industry too big, to disrupt.

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